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No sector says "go big or go home" more than the oil sector. The amount of capital required to research prospective oil finds and subsequently drill narrows the field of prospective companies dramatically.

So when an exploratory-stage company does make a find or sees promising reserves, it pays to take notice. That was the case over the past few months with Cobalt International Energy (NYSE: CIE) .

Less than two weeks ago, Cobalt released better-than-expected drilling results from the Cameia-1 well, which is located on block 21 of its Angolan offshore holdings. The possibility that Cameia-1 could yield 20,000 barrels per day crushed its own early projections and jolted the likelihood that adjacent pre-salt fields in the area could yield big results for BP (NYSE: BP) and Statoil (NYSE: STO) , which are also big players in the Angolan offshore oil fields. But has the market priced Cobalt for perfection? I'm inclined to think so.

Cobalt reported its fourth-quarter results yesterday and shareholders were given a stark reminder of what it's like to own an exploratory-stage oil company. Cobalt's $51 million loss was nothing out of the ordinary, nor was its $134 million full-year loss, since it has no revenue-generating operations. What was a surprise was the 47-million-share secondary offering that Cobalt dumped on shareholders despite the fact that it ended the year with $1.54 billion in cash.

Aside from the obviously dilutive effect that 47 million more shares -- of which 15.7 million are new and the rest are being sold by existing shareholders -- will have on the stock, it puts into perspective how rapidly Cobalt is burning through cash. And you can expect that cash burn only to increase. Cobalt projected that its 2012 capital expenditures will be in the range of $550 million to $650 million, which is up from its previous guidance and roughly three times the amount it spent in 2011 ($194 million).

Just having the oil doesn't necessarily mean it will translate into success for Cobalt's bottom line. I do appreciate the vast difference in business models between ATP Oil & Gas (Nasdaq: ATPG) , for example, and Cobalt, but ATP is purportedly sitting on a sea of oil reserves that it hasn't been able to capitalize on. There's no guarantee that Cobalt's finds will translate into bottom-line results -- at least not in terms of valuing the company at $12 billion.

With years of projected losses on the horizon and the prospect of more dilutive share offerings still present, I can't help but feel that Cobalt investors are taking a very large gamble buying into the stock here. Although Cobalt is currently the worst-performing stock in my CAPS portfolio, I am nonetheless sticking by my CAPScall of underperform on the company.

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Comments from our Foolish Readers

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Three weeks ago -- before Cameia 1 proved up-- I would have been more in agreement with your POV. Today, however, the Angola pre-salt leases held by CIE could easily be a $50-100 Billion asset. Are risks still present? Of course! Normal risks of E&P will remain with CIE for many years. But the fact remains that proven reserves have a market value and you will see that value reflected in the equity. It is also worth noting that the 30 Billion shares to be sold by insiders are NOT new equity and, more likely than not, are being sold now for two good reasons NOT related to the prospective value of CIE's assets: namely, (1) original shareholders want to lock in the current 15% capital gains tax rate and (2) prudent portfolio managment requires that any position that grows by a factor of X6 in a short time be reduced.

I'm not saying that CIE should be bought without reservation at $32 but IMO the secondary is not as negative as you make it out to be. MS's 2012 price target of $38 still seems reasonable based on current CIE pre-salt leases.

CIE pre-drill guidance of reserve of 1bn. Now it could be substantially higher depending on where the oil water contact is. If u use the typical oil conventional valuation of $3/boe (the NPV of production, opex and capex required etc), the market is pricing in 12bn / 3 = 4bn of recoverable reserves. Is 4bn achieveable? I believe so, estimates for Cameia are already going for 2.5-4bn in size depending on where the oil water contact is. I am also keen to know whether Bicuar and Cameia is also connected given the close proximity of the two fields (that would really a bull case if true).

Other upsides potential includes the un-revised reserves of Lontra (pre-drill is >2bn) and Bicuar (1bn) - noting that this is the same oil fairway.. and this is not counting the numerous smaller prospects in the fairway. In addition, CIE is also the 5th largest acreage holder in GoM. Other upsides include the higher API of 44 degree (better than brent at 38), reservoir qualities. Lastly NPV of $3/boe is conservative, it should be closer to 5-6/boe given the named factors above. I would be watching the Gabon acreage as well because the economics would be 3x better than Angola...

The actual dilution is not as bad as the headline news look.. there is only 15.7m +7m new shares which equates c.5%. The rest of shares sold are secondary (by existing shareholders) which are not dilutive.

The company has cash but no debt; hence do expect some debt raising along the wayas well. This is all part and parcel of an Exploration moving to E&P..

Sean, as one that follows drillers to the tune of more than 100 hours per month research time I really have to say that I find your analysis very shallow. The comments made by oily and prodod above are thoughtful and reflect a level of research that I haven't seen in your comments on drillers. I don't mean to say that you shouldn't have an opinion and you shouldn't publish that but please do more basic research before you do. Given the normal course of events CIE will either contract for development support or more likely will monetize its Cameia asset to someone that can develop it such as STO or other large players in that market. Even Noble has monetized its Leviathan and Tamar assets by selling forward product contracts for (I believe the value to date is $18 billion). So if CIE does production tests suggesting an NPV of 2+ billion barrels it will likely monetize some of that and use the proceeds to develop other projects. That puts revenues in the tank and documents the proved and probable assets in a manner that others can do valuations of CIE assets.

Sending report...

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues. Follow @TMFUltraLong